From there, he goes on in his typical dirty street fighting style to misstate a 1932 letter signed by Hayek, Lionel Roberts and others that was sent to London's The Times. The letter was in response to an earlier letter by John Maynard Keynes, A.C. Pigou and others.

Krugman claims that the letter insists:

that big deficits somehow caused the crisis[Great Depression]

The letter does no such thing. It is simply stating that borrowing, once a crisis starts, has the harmful effect of crowding out private sector borrowing, and making it much more difficult for the economy to recover. That's all the five paragraph letter says about borrowing.

...borrowing and spending on the part of the public authorities... tend to drive up the rate of interest

This is not a forecast by Hayek and the others of a particular absolute level of interest rates but merely the observation that additional borrowing by the government has the tendency to push rates higher. How could it be otherwise? Does Krugman actually think that more borrowing pushes interest rates down? I'd like for him to show us the chart on that thinking!

Instead, Krugman goes on via charts to "prove" Hayek wrong through the distortions he makes of Hayek's views.

Hayek's contributions in the field of economic theory are both profound and original...his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

As the Nobel Committee specifically acknowledged, Hayek's business cycle theory was about monetary and credit policies (as opposed to a theory of government borrowing). It is an incredible distortion by Krugman to imply that Hayek held that government borrowing caused the Great Depression.

The Nobel Committee is clear on Hayek's thinking, but perhaps Krugman is not impressed with the thinking of the Nobel Committee.

Certainly no surprise coming from that cliche model of the arrogant, condescending, smug, mendacious, intellectually bankrupt, "I know what's best for you", academic pseudo-intellectual. I guess he has to spin lies about the mammoth Hayek so he can once again prove how much smarter he is than everyone. Is this like a genital measuring contest for economists? Some ego on that guy. I never put much stock in so-called "experts" with fancy letters behind their names like some people pathetically do, but Krugman truly is a fraud who doesn't know when to shut up.

Yes Paul, when your central bank prints money to buy the debt that your government is issuing, rates tend not to rise. When your currency is the worlds reserve currency, you can exploit the fact that its in the best interest of all the worlds governments to protect your credit rating to avoid reserve currency depreciation. When your currency is based on nothing more then a promise that is measured against a floating exchange rate system of promises of other countries that actually desire their currency to depreciate against yours, its in their best interest to buy your debt which holds rates down. But guess what Paully, that's all about to change and when it does change you better get on the LVMI website and order your Austrian starter kit so you can figure out what comes next--assuming you really care of course.

Krugman should explain why fiscal consolidation is in the agenda of governments advised by him, like Zapatero's in Spain, which is deadly indebited. Krugman, since years back, has had various meetings with Spain's PM, advising him to increase public expenditure as the remedy to Spain's growth problems. Now it is a fact that Spain is a Zombie, financial-wise, and the whole world is holding its breath.

Mathematics is a language. What your actual complaint is: Austrian economics does not follow the hypothetico-deductive methodology which is conflated (illicitly) with "science". To which I ask: so what? Economics that is light on actual economic theory and heavy on little else but elegant formulae is bunk pseudoscience.

"and they have been blown out of the water by actual experience over and over again. "

On the question of why interest rates don't go up despite higher govt debt, I found this useful:

"When government borrows, it absorbs some of the supply of loanable funds, but at the same time, by creating expectations of higher future taxes, it makes risky investments less relatively attractive and thus induces a “flight to quality”—that is, to government bonds. The net effect on interest rates is indeterminate, but private investment surely falls.

The prediction of this account is that more government debt results in less private investment. This prediction is not falsified by recent US macroeconomic history. Private capital formation averaged just over 20 per cent of GDP from the end of the Second World War until the 1980s. It then fell, concurrently with the Reagan deficits, to a low of 17 per cent in 1991. Later in that decade, as deficits turned into surpluses and the real per capita federal debt began to fall, investment increased to almost 21 per cent of GDP. However, such investment declined under the Bush administration. Moreover, much of the investment that did occur in the George W. Bush years was in residential buildings, which now appears to have been very unproductive, but enjoying a politically privileged status because the US median voter is, or would like to be, a homeowner.

If government borrowing tends to suppress and distort investment, this explains why the strong “New Economy” productivity growth that pulsated through the economy during the fiscally conservative Clinton administration lost strength during Bush’s first term and collapsed after 2005. This is one causal connection between the Bush administration’s deficit spending and the late-2007 economic contraction."

1. While Hayek’s main theory involved money and credit, it can also be applied to government spending in general. Young Jonathan Finegold Catalan (age 23) wrote a fabulous article today applying Austrian concepts to government spending at:

http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics

2. “Anonymous” is a busy troll who hasn’t the slightest familiarity with basic or non-basic Austrian concepts. Anyone you spouts the “you don’t use math” nonsense is telegraphing their ignorance. Where does math help in disproving the truism that a loan of funny money created out of thin air steals purchasing power from those holding the existing money? Even Keynes knew this (at least in 1919):

By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.

Further, Jonathan’s article presents the very explanation regarding government induced discoordination that non-Austrians meticulously and purposefully avoid understanding, much less engaging.